All signs point to an economic slowdown

From bustling Wall Street to the quiet corridors of the Federal Reserve, there's widespread agreement that the once-sizzling U.S. economy is slowing. The question now is what's next: a return to stable, modest growth or a skid into recession. The answer will play out in the months ahead. It depends on whether soaring energy prices ease, inflation threats diminish and the slumping housing sector stabilizes or sinks.

Richard Berner, the chief U.S. economist for Morgan Stanley, expects the housing slowdown alone to trim U.S. economic growth by as much as 1.5 percentage points. The housing boom helped drive economic growth through a combination of rapidly rising home values and historically low lending rates on refinancing and home-equity loans. These led many Americans to use their homes as a sort of ATM, borrowing against their rising value to fund vacations, new cars or college tuitions. Now that may be ending.

Meanwhile, oil prices keep climbing. Higher oil prices ripple across the economy, driving up the cost of everything from gasoline to asphalt to fertilizer. Businesses pass on those costs to consumers. That's inflation: the rise in prices across an economy. The tipping point for recession could be some supply disruption like last year's hurricanes, which crumpled oil rigs and platforms across the Gulf of Mexico. "When you pair the level of interest rates and that pressure from oil prices, it's more pessimistic than anticipated," said Doug Duncan, the chief economist for the Mortgage Bankers Association in Washington.

(2006-08-12 15:54:51 SGT) [Biz] Permalink

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